Western Alliance Bancorp (WAL) 2017 Q2 法說會逐字稿

Good day, everyone. Welcome to the earnings call for Western Alliance Bancorporation for the second quarter of 2017. Our speakers today are Robert Sarver, Chairman and CEO; and Dale Gibbons, Chief Financial Officer. You may also view the presentation today via webcast through the company's website at www.westernalliancebancorp.com. The call will be recorded and made available for replay after 2:00 p.m. Eastern time, July 21, 2017, through Monday, August 21, 2017, at 9:00 a.m. Eastern time by dialing 1 (877) 344-7529 and entering passcode 10109628.

The discussion during this call may contain forward-looking statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements contained herein reflect our current views about future events and financial performance and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement. Some factors that could cause actual results to differ materially from historical or expected results include those listed in the filings with the Securities and Exchange Commission. Except as required by law, the company does not undertake any obligation to update any forward-looking statements.

Now for the opening remarks, I would like to turn the call over to Robert Sarver. Please go ahead, sir.

Thank you. Good morning, everybody. Welcome to Western Alliance's Second Quarter Earnings Call. Dale and I are going to walk you through the slide deck that's been posted on the website. And then we'll open the lines for your questions.

Before we get started with the presentation, I'd like to take the opportunity to welcome Ken Vecchione to Western Alliance. Ken rejoined the bank as our President. Many of you recall Ken served as our Chief Operating Officer and President from 2010 to 2013, and he continued to be a member of our Board of Directors. We're pleased to have his leadership in the organization. Ken's vision helped us establish our National Business Lines as well as put together the architecture around our enhanced risk management within the company.

I spoke on the last call about needing to focus more of my attention on continuing to grow our earnings, bring in business. And bring in Ken to the team, along with Jim Haught, who joined us in April as Chief Operating Officer, will allow myself and Dale to spend more time identifying ways to continue to improve our financial performance as well as manage our risk portfolio.

This was our 28th consecutive quarter of record operating earnings, as our strong balance sheet growth continued while we maintained our interest margin and asset quality, held expenses flat and again grew our tangible book value. Net income for the second quarter was $80 million or $0.76 per share. That's up 23% from $0.62 of operating EPS in the second quarter of last year, which was before $0.02 in acquisition charges. Our strong core deposit growth reduced our loan-to-deposit ratio, increased our cash position, which resulted in the 2 basis point reduction in the net interest margin as a percentage.

Last quarter, we discussed that we made some investments in our infrastructure that took our expense run rate up, and we expected expenses to be flat in the second quarter as they were. Our flat expenses, coupled with $14 million increase in revenue, brought our operating efficiency ratio to 41.2%, improved from 44.4% on a linked quarter basis and from 43% in the second quarter of last year.

Balance sheet growth was solid again, with $327 million in loan growth during the quarter and $1.1 billion from the prior year. While we had $675 million in deposit growth, which was entirely non-interest-bearing accounts, deposits are up $1.8 billion in the last 12 months.

Asset quality was also strong, with nonperforming assets falling 40% from a year ago to just 0.32% of total assets. And we flipped back into a net loan recovery position with $1.1 million for the second quarter. We provided $3 million during the quarter into the reserve for continued loan growth.

With our return on tangible equity again in excess of our balance sheet growth, our tangible common equity ratio rose to 9.5% at June 30. And our tangible book value per share rose at a 21% annualized rate during the quarter to $16.71.

Net interest income rose $13.4 million for the quarter to $192.7 million, driven by $540 million in average loan growth and realizing the full effect of the FOMC rate increase in March and is up 18% from a year ago. Higher deposit service charges were the primary driver of the 6% increase in operating noninterest income on a linked quarter basis to $10.5 million. As I said, operating expense was flat from the first quarter to $88 million. Operating leverage improved over last year as revenue rose 18% and expenses were up 13%, resulting in an increase in pre-provisioned net revenue of 22%.

The provision for loan losses was $3 million for the quarter and benefited from net recoveries and lower levels of nonperforming loans. After modest losses incurred in disposing of $16 million in repossessed real estate, pretax income was $111.9 million.

The tax rate rose to 28.5% as the cyclical excess tax benefit on share-based payment awards that was recognized in the first quarter this year does not repeat in the current quarter, resulting in $80 million of net income, which is up 30% from a year ago. Diluted shares were stable from year-end at 105 million as per-share earnings climbed 27% to $0.76.

I'll now turn it over to Dale for some further details on our performance, and then I'll talk a little bit about our outlook.

For net interest drivers, loan yields rose 13 basis points during the quarter, as just over half of our portfolio was variable rate and benefited from the increase in prime as the target Fed funds rate was raised by the FOMC. The investment portfolio yield declined to 3.05% during the quarter as the balance grew by $414 million. The average yield on securities purchases during the quarter was 2.8% as the yield curve flattened.

Reflecting the rising rate environment, the cost of interest-bearing deposits rose 5 basis points during the quarter, although our total cost of liability funding increased by only 1 basis point to 0.35% as it benefited from our strong non-interest-bearing deposit growth. Given the strong deposit growth, we held no FHLB or Fed funds borrowed positions at quarter end.

The increase in average loans of $540 million and securities of $365 million during the quarter drove net interest income to $193 million. The average balance of non-interest-bearing deposits rose over $1 billion during the quarter. However, 40% of this increase was held in cash, yielding just over 1%. Adding this $400 million at a 1% spread reduced the margin otherwise by 9 basis points. However, this was largely offset by higher loan yields from the rate increases in March and June, resulting in the actual margin only decreasing by 2 basis points from Q1.

Purchase loan accounting accretion rose from $6.4 million in the first quarter to $7.1 million in the second quarter and had a 17 basis point effect in total on the margin. The graph on the right shows that we expect fairly stable accretion from purchase accounting marks in the next few quarters. Actual accretion, however, has been higher than what is shown here due to loan prepayment activity, which accelerates discount recognition, although unlike the increase we had in the second quarter, it should be on a gradual downward trend.

Strong revenue growth during the quarter, coupled with flat expenses, drove the efficiency ratio to a record low of 41.2% compared to 43% in the second quarter of '16. As we stated on our last quarterly call, seasonally, the first quarter is the most challenging from an efficiency perspective. We achieved this record efficiency while continuing to invest in the company's people, infrastructure and compliance and risk management programs.

The compensation proportion of our expense rose from 57% to 59% during the past year, a trend which we expect to continue as incentive costs closely track balance sheet growth and financial performance.

Our pre-provision net revenue of 2.46% and 1.71% return on assets also marked new highs for the company and have consistently been in the top decile compared to peers.

As deposit growth again exceeded loan growth during the quarter, our securities and cash position climbed $374 million during the period. Total assets rose to $18.8 billion and shareholders' equity to over $2 billion. The loan-to-deposit ratio was 87% compared to 91% 1 year ago.

Loan growth of $327 million during the quarter was led by $128 million in mortgage warehouse, as growth rebounded from a decline in the first quarter. Regionally, loans grew $50 million in Arizona, $42 million in Northern California, $32 million in Southern Cal, while declining $40 million in Nevada. During the quarter, we continued our program of resi loan purchases as an alternative to larger growth in mortgage-backed securities, resulting in an increase of $30 million in residential and consumer loans. As short rates rose but the yield curve flattened during the quarter, the weighted loan origination rate was the same as that paid down on loans during the period.

Growth in non-interest-bearing deposits comprised more than 100% of the $675 million total deposit increase we had during the quarter as money market balances declined. This continued success in deposit gathering for non-interest-bearing DDAs has increased the proportion of the portfolio to over 42% compared to 37% a year ago and was the major factor as to why our total liability funding cost rose only 1 basis point from Q1. Among the business segments, Arizona led deposit growth with $524 million, followed by $130 million in technology and innovation, $87 million in Northern California, and $74 million in our Homeowners Association services.

Total adversely graded assets declined $19 million to $368 million as NPAs fell 23% to $61 million or 0.32% of total assets. These figures are net of $24 million of purchase accounting discounts to unpaid principal balance on the purchase credit impaired notes. On a ratio basis, adversely graded assets and NPAs have improved from 2.24% to 2.06% on assets over the past year.

Gross credit losses of $2.8 million during the quarter were more than offset by $4 million of recoveries of prior charge-offs primarily in Nevada, resulting in net recoveries of $1.2 million or 3 basis points of total loans. Year-to-date, net loan losses are only $140,000. Provision expense of $3 million declined during the quarter -- declined from the first quarter in part due to net recovery performance. The allowance for loan and lease losses rose to $132 million, up $10 million from a year ago. This reserve is 1.08% of nonacquired loans, as acquired loans are booked at a discount to the unpaid principal balance and hence, have no reserve at acquisition.

The allowance for loan losses is enough to cover over 10 years of gross loan losses at our current run rate, which is well above the 4-year duration of the portfolio. For acquired loans, on the lower graph, credit discounts totaled $37.8 million at June 30, which was 2.19% of the $1.7 billion purchased loan portfolio.

Capital growth again exceeded balance sheet expansion, resulting in our ratios continuing to climb over the past year. The decrease in the leverage ratio during the quarter results from it being the only ratio that is computed using average instead of ending assets. Average assets rose $1.3 billion over the first quarter as non-interest-bearing deposits grew. By comparison, ending assets were up $722 million for the period. We expect the leverage ratio to increase this quarter as average total asset growth is likely to be significantly lower.

Tangible book value per share rose $0.85 in the quarter to $16.71 and is up 17% in the past year, while return on tangible common equity rose to over 18%.

Thanks, Dale. In terms of looking at our outlook for the rest of the year, for the most part, it's kind of same old, same old. In terms of our financial position, our second quarter performance reconfirmed our outlook for low double-digit organic balance sheet growth for the rest of the year.

Loan pipelines remain strong. Geographic divisions are healthy and growing. As well as our National Business Lines, we expect to see growth in all categories of our loan and deposit book for the remainder of the year.

Given our projected loan deposit growth and asset-sensitive balance sheet, we're well positioned for continued revenue increases. We expect yields on our loan portfolio to climb in the third quarter as the prime rate increase in mid-June is yet to be fully reflected in revenues. However, this improvement will be partially offset since acquired loan accretion is likely to fall from the elevated level in the second quarter as the acquired portfolio continues to pay down.

Our cost of interest-bearing deposits rose 5 basis points during the quarter, which would represent a deposit beta of 20% relative to the 25 basis point increase in the target Fed funds rate. If rate increases continue, we expect deposit betas to eventually [time] towards our 45% target.

From the second quarter, we expect our expense growth rate to average approximately 2/3 of the revenue growth rate, which should lead to further improvement in our efficiency ratio over time.

As you know, we have a disciplined credit culture. Our asset quality metrics remain very strong. We don't currently expect any significant credit events that would change our stable performance in this area. However, the regulatory agencies have combined to recently provide new guidance on the rating of preprofit technology companies. This change will not affect the accrual status or inherent risk of our tech lending portfolio from what it is today, but it will result in some higher levels of reported special mention credits.

Bridge Bank's technology loans have had an average loss rate of 13 basis points for the last 5 years. I personally had a chance to see this portfolio up close over the last 18 months as we've gone through a little bit of a cycle in the valuations of technology companies.

In summary, the new regulatory guidelines are as follows: if the credit -- if a preprofit credit has less than a 6-month RML, remaining months of liquidity, that loan must be graded special mention or worse, unless it has a signed firm term sheet. A lot of the credits in this space go below 6 months. Companies are in the process of underwriting new investments into the company. And these companies are pretty successful, at least the ones in our portfolio, have been very successful raising additional capital and continuing to fund the company. But at a 6-month level, they need to go into special mention. And so I think over the next 6 months, you'll see that number jump a little bit. I don't think it will be too significant, but it could be somewhere in the maybe $50 million range. Our level of special mention credits in general compared to peers is very low. So I expect to see some of those credits move into that and then also move out very quickly. But that is a change coming.

Consistent with our historical metrics over the past several years, we expect our levels of nonperforming assets and net charge-off ratio to remain very low for the rest of the year.

So with that, be happy to answer any questions. Overall, as can see, it's just another solid quarter for a solid bank. Thanks.

(Operator Instructions) Our first question will come from Brad Milsaps of Sandler O'Neill.

This is actually Peter Ruiz on for Brad today. Just wanted to first touch on maybe looking at loan growth obviously has been nice and deposit growth has been even better. And I appreciate your updated guidance on continuing to see low double-digit asset growth. But is it safe to assume that maybe deposit growth continues to outpace loan growth here in the near term? And are there any special things going on there that you're seeing in terms of loan growth? Obviously, there's nothing wrong with a low double-digit pace there. Just wondering if there are any sort of special situations.

No, I think the deposit growth probably will outpace the loan growth. And what you see with us is we're a little more aggressive in terms of organic growth in a economy that's maybe not quite as frothy and a little more conservative maybe as the economy gets a little more frothy in some of the areas we do business with. So we're just, first and foremost, we're concerned with asset quality, improved lending. And if that means we grow a little bit less than we did for the first 5 years coming out of the recovery, that's probably a smart thing.

All right, great. And maybe just -- could you maybe -- looking at credit, obviously, had the drop there in special mentions, but classifieds kind of ticked up. Can you talk about maybe any changes or any progress related to those construction projects you mentioned last quarter, and sort of any movement in those buckets?

Yes, we -- yes, I talked about a couple deals last quarter. So one of them was a special mention credit that had some cost overruns, but mainly some long delays in development. It was in Los Angeles residential. And that all kind of got solved and money got put in and lots have finished and all that. So that came off the list. We do have a hotel under construction that suffered some rain delays, pretty significant cost overruns, which our borrower funded, which is good. And that hotel is substandard. It is supposed to open in the next 3 to 4 weeks. Fortunately, our loan-to-value ratio is going to be under 50%, and the hotel's in a fantastic market. So once it opens, it gets a little history under its belt, it will be upgraded. So I think that will probably come off the list either in the third or fourth quarter. That's our second largest sub. Then our largest sub, which we talked about, is a company that was sold to one of the larger market cap companies in the country. And that loan comes due in the fourth quarter. And it will -- we feel pretty confident it will just be paid off when it comes due. So between those 2, that represents a little over $40 million on the substandard level. And I think those will be up -- both be off by year-end, and that will pop that number back down. Unless something new comes up, which we don't see right now, but could.

That's great. I'll step back for now. Thanks.

The next question will come from Timur Braziler of Wells Fargo.

First question is regarding some of the commentary towards the end of the call on the Bridge loans and the new regulatory guidance there. I guess what's the balance of the loans that are currently below 6 months are remaining liquidity? And if they do move to substandard, is that going to potentially drive any kind of reserve impact and not elevated provisioning? Or is that not the case?

No, I don't think that's the case. In terms of our portfolio in Bridge, the niche Bridge is in companies that have a product. They're selling a product. And about 2/3 of our business is secured with receivables in cash, some with formal receivable lines, some with informal receivable lines. The -- what we see is going to happen is we'll have more credits moving in and out of special mention. I don't think it will affect -- I don't see it affecting the substandard category, the nonaccrual category. I think it's really just going to be more of the special mention credit category. Because Bridge has been and our customers have been pretty accurate and pretty effective at these new rounds. And obviously, that's why the portfolio over the last 14 years has performed so well. So I don't think it's going to affect the eventual substandard bucket or nonaccrual bucket or loss bucket, but you're going to see more movement in the special mention bucket. And in terms of the portfolio, the Bridge portfolio in total on the tech side is about $700 million. And of that, the companies that are in a preprofit stage of that $700 million is probably somewhere around the $400 million to $500 million. And today, the number of those credits that are under a 6-month RML would be, I'm going to say, maybe somewhere around $100 million. But some of those do have signed term sheets, so it's not an all black and white. I think that number may be up to $50 million in terms of potential increase in special mention is probably a reasonable estimate at this point. But it doesn't mean that those credits are going to continue to flow down the line into substandard or into nonaccrual, and therefore affecting the level of reserves. So I don't really see it affecting our loan loss reserve levels at all.

Okay, great. Next, maybe just on the margin. Dale, what was the cash position at the end of the quarter? And what is the expectation for deposit growth to remain as strong as it has been outpacing loan growth? Is the June hike going to be enough to maybe see some margin expansion in the coming quarter? Or is that cash position going to continue to be a headwind?

No, that cash position has been run down now to kind of its prelevel $400 million. We expect the margin to rise this quarter.

Okay, great. And then one last one from me on expenses. Has the regulatory conversation kind of come to a head, and the regulators have signed off on what was necessary to be done in the first quarter? Or is this something that you guys have put in the work but are still waiting kind of regulatory sign off or the regulatory green light on anything coming down the pike in the remainder of the year?

Yes, I mean the regulators don't dictate who we hire and what our overhead levels are. I mean they're really a function of the bank and the growth, the bank's complexity and how we manage our risk profile. So -- they have no sign-off on anything as it relates to our overhead. So I'm not quite sure where you're going with that. But as it relates to some of the infrastructure we expanded, we've pretty much done that. What we've added -- coming on obviously is Ken, a couple other key positions, but I don't -- at the end of the day, I really don't see us operating materially different than we have for the last 8 years. We just grow our revenue faster than our expenses. And somehow, we seem to manage to do that every quarter. So I don't see that changing.

And next, we have a question from Brett Rabatin of Piper Jaffray.

Just a clarification on the margin and the excess liquidity. So it sounds like the cash position has drawn down. And so the margin would have been 9 or 10 basis points higher, absent that in 2Q. You've got the June rate hike. Did the cash position go down due to investment in securities, loan growth? Can you give us any more help on just how you're managing the balance sheet after an early strong deposit growth quarter?

Yes, well we -- you saw we had a very large increase in average DDA. That was more than the quarterly increase in DDA. So we had a bloated DDA balance for part of the quarter. And that was invested or held at the Federal Reserve account, yielding just over 1%. That has gone away. And as a result, just taking that away will boost the margin by itself. And then in addition to that, you had the points you brought up, Brett, in terms of we've got 5/6th of the increase from the FOMC in June is still in front of us in 3Q.

Okay. And then just a clarification on the -- you talked about expenses somewhat. The 2/3 -- you used to always talk about $1 of revenue or $2 of revenue for every dollar of expense. And now, it sounds like that's a little bit different. Is that due to anything in particular? And can you talk maybe more about the medium-term expense growth outlook as you think about things you're investing in?

I think it's mainly due to the fact that our risk appetite on the credit side, our loan book is not going to be going at 20% organically. We don't think it's the right time in the market to do that. And we don't see the right risk-adjusted returns to do that.

Okay. And then if I can just sneak in one last one. On CRE, are you guys a little more cautious on CRE, just thinking about the growth you had in the quarter? Are you not seeing as good opportunities? What's the thought on CRE from here?

No, I think on the CRE side, we're always trying to be proactive, not reactive. And a big part of our book is on the residential side. We finance lots in production housing to some of the top builders with on-balance sheet projects. And that market looks pretty good. I mean it's been a steady increase. The levels of home building is still well below historical levels and not even close to where it was before the last recession. And we think that's a really good space to play in.

In terms of the commercial side of things, where we have not been a big retail lender, I've never really been a big fan of taking long-term retail credit risk. We played mainly in office, medical and commercial office space and industrial. On the apartment side, we really had refrained from doing much apartment lending over the last 5 years. We're just getting into it a little bit as the market has kind of shut that space down. We're finding some select opportunities in some of the markets that haven't been overbuilt. And we're in a position now to get 40% to 50% cash equity in projects and get good pricing. So we're -- we try to manage our real estate book in a very savvy manner. And I think we've had a -- about a 30-year history of doing that.

The next question comes from Chris McGratty of KBW.

I wondered if you could speak to credit spreads in the C&I portfolio. Obviously, the growth in your C&I book has been very strong year to date, and I think the deposit growth is pretty correlated. Wondering if you're -- see more -- you're willing to compete more aggressively on price to get the deposits in the door, seemingly that -- a factor that most banks would love to have, the deposit growth.

Are you talking about to compete more on price on the loan side or deposit side? I didn't quite get you.

No, the -- I'm sorry, the loan side.

No. We're -- we are pretty disciplined on the pricing. And we're focused on relationships where we can really add value. And that's one of the reasons you see more growth in some of our National Business Lines. Because there's less competition, less banks that have the people and the sophistication, the expertise in those specific areas. So we're -- we want customers here because, number one, we think we can add value to the relationship, and they're willing to pay for that value.

That's great. Dale, if I could on the margin, I think in the prior comments, you mentioned each quarter hike is about 6 basis points of the margin. Is the margin and are your loan yields responding now that we're a few hikes in? Are they responding the way that you thought they were? Is that kind of still a fair guideline going forward?

Yes, it is a fair guideline. There has been one development, though, that has taken away a little bit from what otherwise would have been a stronger increase, and one that has been the opposite. So our deposit betas have been well below 45%, which means that we should be even above the 6 basis points for 25 because we're not going to raise our costs as much. However, at the same time, what we've seen is the yield curve has come back down. And the commercial real estate market really prices off of the 3- to 10-year yield curve, which has dropped significantly from the end of last year and particularly the first quarter. So that has taken away a little bit of what would have been even a stronger performance, but that has basically been offset by the slower deposit betas.

Great. And if I could sneak one in on M&A. You obviously are accumulating capital, really at a nice rate. I'm wondering if there's any change in what you're seeing or maybe any closer to finding an acquisition.

No, not really. I'd say about the same as last quarter. I mean we're in the market looking at a number of opportunities, but nothing in the imminent future. We -- one of the challenges, people always say, well, you trade at a high multiple book and this and that. Well, we also grow earnings faster than about every bank in the country. And so we just got to be cautious on how we give those shares out. So that adds a little bit of a challenge.

The next question will come from Jon Arfstrom of RBC Capital.

A question on deposit growth. You had another good quarter, but Arizona was particularly strong. Is there anything notable there driving that growth?

No, I mean we continue to execute in terms of bringing in relationships on the commercial side that we take their operating accounts as well. And we're having, I'd say, increased success in that category. I wouldn't get too hung up on the Arizona piece. I think we're kind of seeing that everywhere. I do realize that's where we posted some of those items, but...

Yes. And to a certain degree, I think if you look at most banks, a lot of growth tends to come from headquarters. So we got a lot of senior executives here and just naturally, a lot of the larger relationships are coming from this area.

Yes, yes. Just a few good quarters in a row and just it was a sizable increase. And then on the loan growth, you called out the warehouse coming back a bit. Anything else to call out on the loan growth that was unusual? Or would you view this as a pretty typical quarter?

I think pretty typical. I don't -- nothing unusual.

Okay. And Dale, do you think the warehouse size can hang around at this level for the next quarter or so?

Yes, I think it can. I mean the reason why the warehouse came down in Q1, and this wasn't just us, it was even more pronounced at some other institutions, is because the rates rose and so the refi business really contracted. With rates coming back down, you're seeing refi activity pick up again. So unless we see a significant rate rise on the term structure, I think you're likely to see warehouse perform -- continue to perform well.

Okay. Okay, good. Robert, just one for you. You mentioned this earlier. But with Jim and Ken in place, are you already changing your day-to-day activities? And if so, what's different?

Yes, I'm -- well, I will say this. With Jim in place, Jim's taking a fair amount of the load off of me and Dale on some of the administrative side in terms of operation technology. Ken is in the process of kind of going on the road and visiting all our offices and all our people. And over the next 90 days or so, he'll be taking some of my direct reports. I got like 17 right now and I want to take that down to about 6 or 7 and really free up more time on my desk to get out and try to generate revenue, which is probably what I'm better at anyway.

The next question comes from Casey Haire of Jefferies.

I wanted to follow up on the efficiency. Obviously, very good improvement this quarter with the liquidity drag. Just what is sort of -- and it sounds like there's more on the come. What is sort of the optimal efficiency ratio for what's a pretty diversified business? How low can we go from here?

Yes, I don't know. I mean to be honest, I don't really pay much attention to it as a percentage. I mean it stands out being pretty low because you compare to peers but our business model is totally different than peers. So to me, it's about operating leverage and growing earnings per share and I don't -- I wouldn't really target a number or a range.

Okay, great. And on the deal front, we've seen some activity this week, some commercial finance companies selling without a deposit funding and strong growth that they're partnering up with banks. I'm just curious, are you seeing those opportunities? And if so, why -- what's...

Yes, we are. And I think those are good opportunities in general. Those are good opportunities. And we are, and we look at all of them. But we maybe underwrite them different than other people or what have you. And some are more appealing than others. But I do think that is an area that intrigues us and can fit in nicely if it's the right situation.

Okay, great. And just last one from me on the non-interest-bearing deposit growth. Apologies if I missed this, but in terms of characterizing it, is it mostly -- is it broad across the footprint or is it mostly coming from Bridge? Just some color on where these non-interest-bearing deposit flows are coming from.

Yes, it's -- I mean Bridge has had a lot of success here. But I would certainly not -- most of the growth is not from them. I'd say it's fairly broad in terms of kind of where we're seeing improvement.

And the next question is from Gary Tenner of D.A. Davidson.

I had a question about the National Business Lines. Quarter-to-quarter and year-over-year, they've been, call it, 75% to 80% of your loan growth, and they're now 45% or so of total loans. Can you talk about kind of the comfort level in terms of how large that gets relative to the core commercial bank?

To me, it is our core commercial bank. I mean we're not just the Arizona, California, Nevada regional bank. I mean we are a national bank. And these National Business Lines we have, to me, are core to our business. And we're going to continue to expand them as we can do it in a prudent manner with good risk-adjusted returns. So I don't -- I know sometimes, you guys like to separate all that out. But I don't. To me, there's -- it's not really much of a difference. I mean if I've got an operating company that I bank in Boston or an operating company I bank in Phoenix, it doesn't really make a difference to me.

Yes. So there's no reason to think that over time, the existing products or if you add some other lines there that, that wouldn't become bigger than the regional banks?

It may or may not. I don't know. It will depend where we see those opportunities to be.

Okay. And within that, just on the hotel finance, the hotel franchise finance, those balances are down about 5% so far this year. When you bought the portfolio last year, you talked about it being an ongoing business. Are you -- is there something you're seeing in that segment that is having you pull back on new business? Or is it...

We said when we bought it, we'd keep the portfolio pretty stable on a macro level. I think in terms of commercial real estate, that's one of the product types that you've seen significant appreciation in over the last 6 or 7 years. And so our level of underwriting today is commensurate with where we see that risk. And I see that portfolio somewhere between 8% to 10% of our outstanding loan book. But it's not a book that we're looking to push aggressively under some of the credit terms that maybe some of the other players are willing to accept.

And this concludes our question-and-answer session. I would like to turn the conference back over to Robert Sarver for any closing remarks.

Yes. No, thanks for joining us. And just another good quarter, I think, as we continue to be consistent in how we approach our business and operate at a high level. So we'll look forward to talking to you next quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.